Lobbying is a well-established means of influencing the outcome of new reforms but during the past year the financial services industry has resorted to a more drastic measure: litigation.

The explosion of new regulations ushered in under the G20 programme to reform the global financial market infrastructure has prompted several suits against US regulators in a development that some experts believe could mark a fundamental shift for the industry.

The Commodity Futures Trading Commission, the US regulator charged with writing detailed rules introduced by the Dodd-Frank Act, has been on the receiving end of three suits in the past year – the first of their kind in the watchdog’s 34-year history.

The International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association brought the first suit against the CFTC in December 2011 when it challenged a rule designed to curb commodity trading. The plaintiffs were successful two weeks before the rule was due to be enforced and the CFTC scrapped it but is appealing the decision.

Four months after this suit was filed, the US Chamber of Commerce and the Investment Company Institute took the CFTC to court over a rule that would require funds to register with the watchdog. The court threw out the case but the plaintiffs are appealing against the decision. A third suit was brought last November by derivatives exchange the CME Group in an attempt to freeze a rule relating to the reporting of derivatives trades. The CFTC subsequently withdrew the provision and the CME Group dropped the case.

The Securities and Exchange Commission, the US’s other major financial regulator, has also been subject to several suits. The CFTC, CME Group, and Isda declined to comment for this article. The Chamber of Commerce and Sifma did not respond to requests for comment.

According to legal experts, these cases mark a discernible shift in an industry that has historically worked closely with its regulators. One regulatory expert at a US exchange said: “What we are seeing in the financial services industry is a movement towards being more like other industries, where regulators are sued more frequently by those they regulate. In the past, securities regulators rarely got sued, but we may well be seeing a sea change.”

Some believe the sheer scale and cost of the new post-crisis regulatory regime, which threatens to overthrow many established business models, has forced firms to adopt more aggressive tactics.

Larry Thompson, general counsel at the Depository Trust & Clearing Corporation, the post-trade services group which has protested against the CME Group’s suit, said: “In the past it has been unusual for firms to bring suits against regulators but I think this is likely to change with some organisations more likely to go down the litigation route because the stakes are so high.”

Accountability

Cost has been central to each case. In an emailed statement, the Investment Company Institute said it had brought the suit because the CFTC had “failed to justify the regulatory excess and added costs” of the rule. The CME Group also claimed in its filing that it would incur “substantial costs” as a result of the rule. Isda and Sifma similarly claimed the CFTC had not undertaken a proper cost-benefit analysis.

Jamie Lake, principal consultant at financial services consultancy GreySpark, said: “Up to now, financial services firms have been quite subservient to the regulators with respect to the reform agenda, but that is turning due to the enormity of the cost involved.” He added that the haphazard nature of the US rule-making process, which has been rushed, unpredictable and subject to last-minute changes, has also provoked frustration among firms. Both the CME Group and ICI-Chamber of Commerce suits accused the CFTC of behaving in an “arbitrary and capricious” manner.

Lake added: “Litigation may increasingly be used as a tool with which to impose more consistency and certainty on the rule-making process.”

The anticipated rise of litigation in the US has raised the question of whether Europe may see a similar trend. The UK is suing the European Union over short-selling and the European Central Bank over clearing rules, but no suits are currently pending with respect to Dodd-Frank’s counterpart, the European Market Infrastructure Regulation.

Statutory immunity

Some European regulatory institutions, such as the UK Financial Services Authority, enjoy statutory immunity – although the European Commission, which ultimately signs off on most detailed rules in Europe, can be challenged in the European Court of Justice.

According to two European public affairs experts, a cultural aversion to litigation in Europe makes US-style suits with respect to new regulations unlikely.

One lobbyist said: “Generally, unhappy parties will lobby for changes in future revisions of the same Acts.”
The lobbyists said that in Europe detailed rules are introduced through a much longer, more painstaking process compared with the US.

Damian Carolan, a partner at law firm Allen & Overy, said: “I think we will see a few more suits, but I’m not sure we will see a fundamental change in the relationship between regulators and those being regulated.

“In Europe, more of our rules are coming out as legislation which is arguably subject to more due process than US regulatory rulemaking, so I don’t see Europe becoming a hotbed of litigation. It is also much harder to challenge EU laws during the rulemaking process.”

Nevertheless, some industry experts believe that the broader issue of regulatory accountability should be subject to greater debate, especially as regulators, under the new post-crisis regime, become more interventionist.

Anthony Belchambers, chief executive of the Futures and Options Association, said: “The regulators are becoming much more intrusive. Under Emir [the European Markets Infrastructure Regulation], for example, the regulators will have much wider powers and will be reaching out beyond the regulated community. You are also beginning to see some regulators make commercial decisions for firms. That’s a worry.”

*Correction: A previous version of this article cited Jamie Lake as managing partner at GreySpark. He is principal consultant.